HOUSTON, Feb. 20 /PRNewswire-FirstCall/ -- Westlake Chemical Corporation (NYSE: WLK) today reported net income of $14.4 million, or $0.22 per diluted share, for the fourth quarter of 2006. This represents a significant decrease from the fourth quarter of 2005 net income of $73.6 million, and $1.13 per diluted share. Income from operations was $8.5 million on net sales of $523.9 million for the fourth quarter of 2006. This compares unfavorably with fourth quarter 2005 income from operations of $112.5 million on net sales of $636.4 million. The decrease in income from operations was primarily the result of lower selling prices and reduced sales volumes and the adverse impact of an unscheduled outage at one of the ethylene units in Lake Charles, Louisiana. This unit was down 55 days beginning September 1, 2006 initially because of an unscheduled shutdown resulting from mechanical problems with a compressor that required extended maintenance. During the downtime, a major maintenance turnaround was completed, as well as tie-ins of portions of a previously announced project to upgrade the feedstock flexibility of one of the company's ethylene units, which is expected to reduce energy costs and provide additional ethylene capacity. As a result of the unscheduled outage, maintenance expenses were significantly higher while unabsorbed fixed costs and lost opportunity were substantial.
Falling energy prices and reduced industry ethylene operating rates, which resulted from ethylene plants coming back online after several planned and unplanned outages in the industry during 2006, put downward pressure on ethylene and ethylene derivatives in the fourth quarter of 2006. In addition, excess products stockpiled by downstream buyers in anticipation of hurricanes that did not materialize added to the oversupply situation. As a result, both spot ethylene and polyethylene prices fell between $0.13 and $0.15 per pound in the fourth quarter of 2006 and were not fully offset by reductions in feedstock costs. In addition, PVC resin and PVC pipe selling prices and volumes fell dramatically in the fourth quarter due to de-stocking of inventory by PVC converters anticipating lower prices, normal seasonal weakness and continued softness in the construction industry. The lower sales volumes in the vinyls segment resulted in lower operating rates and higher unabsorbed cost. Conversely, the fourth quarter of 2005 was one of the best in the company's history due in part to the spike in product prices and increased margins that occurred as a result of Hurricanes Katrina and Rita.
Fourth quarter 2006 results were also negatively impacted by the utilization of the first-in, first-out (FIFO) inventory accounting method as compared with utilizing the last-in, first-out (LIFO) method used by some companies in the industry as a result of falling feedstock costs. By comparison, in the fourth quarter of 2005, the company benefited from using the FIFO method due to rising feedstock costs associated with Hurricanes Katrina and Rita.
Fourth quarter 2006 results were favorably impacted by, among other things, a tax benefit which increased net income by $6.5 million, or $0.10 per diluted share, and a lower effective tax rate for the year than what was previously estimated in the third quarter of 2006. The tax benefit resulted from the reversal of various tax accruals due to the resolution of certain tax matters. Fourth quarter 2006 results also benefited from the settlement of two legal disputes and a settlement offer related to certain environmental contingencies which resulted in the reversal of contingent reserves and favorable settlements totaling $3.1 million after tax, or $0.05 per diluted share.
Fourth quarter 2006 net income decreased $47.3 million, or $0.73 per diluted share, from the $61.7 million net income, or $0.95 per diluted share, reported in the third quarter of 2006. Revenue, income from operations and net income were all lower in the fourth quarter of 2006 than the third quarter of 2006 primarily due to lower selling prices for all of our major products, lower sales volumes in our Vinyls segment and the unscheduled outage at one of the ethylene units in Lake Charles, Louisiana. These reductions were partially offset by lower feedstock costs.
For the year 2006, net income was $194.6 million, or $2.98 per diluted share, which included an after-tax charge of $16.3 million, or $0.25 per diluted share, related to debt retirement costs incurred in the first quarter of 2006. For 2005, net income was $226.8 million, or $3.48 per diluted share. Income from operations was $313.3 million on net sales of $2,484.4 million for the year ended December 31, 2006, as compared to income from operations of $367.0 million on net sales of $2,441.1 million for the year ended December 31, 2005. Results in 2006 were negatively impacted by lower production volumes and higher maintenance expense largely due to a maintenance turnaround at the facility in Calvert City, Kentucky and the unscheduled outage at one of our ethylene units in Lake Charles, Louisiana. Additionally, 2006 PVC pipe sales volumes were lower than 2005 due to weakness in the construction industry and customer de-stocking that occurred in the fourth quarter of 2006. These reductions were partially offset by higher sales prices for the company's major products. Earnings for 2006 benefited from improved feedstock commodity trading gains of $18.6 million as compared to a loss of $3.8 million in 2005, lower interest expense resulting from lower interest rates due to the refinancing completed in the first quarter of 2006 and higher interest income. Earnings for 2006 also benefited from a $6.5 million tax benefit related to the reversal of various tax accruals due to the resolution of certain tax matters. In addition, adjustments of $3.7 million were made in the third quarter of 2006 to further refine the estimate of deferred income taxes and the extra-territorial exclusion income benefit. These tax benefits combined to increase net income by $10.2 million or $0.16 per diluted share in 2006.
Albert Chao, President and Chief Executive Officer, said, "We are pleased to report a strong year in spite of the difficulties we experienced in the fourth quarter and the unscheduled outage at one of our ethylene units in Lake Charles. Our 2006 results were the second best in the history of Westlake. After significant margin erosion in both the olefins and vinyls sectors and markedly reduced volumes for vinyls experienced in the fourth quarter of 2006, the industry is seeing signs of improvement, at least from a volume standpoint. I am happy to say that we completed the acquisition of Eastman Chemical Company's Longview, Texas polyethylene business and ethylene pipeline which will further enhance our integration strategy. We remain cautiously optimistic about the strength in the U.S. economy and thus the prospects for our business in 2007."
EBITDA (earnings before interest expense, income taxes, depreciation and amortization) for the fourth quarter of 2006 decreased 73.6% to $35.8 million compared to $135.4 million in the fourth quarter of 2005 and decreased 67.8% compared to $111.4 million of EBITDA in the third quarter of 2006. EBITDA for the year ended December 31, 2006 was $385.3 million, which included a charge of $25.9 million related to debt retirement costs, as compared to $450.3 million for the year ended December 31, 2005. A reconciliation of EBITDA to reported net income and to cash flows from operating activities can be found in the financial schedules at the end of this press release.
Cash flows from operating activities were $237.2 million for the year ended December 31, 2006, $136.3 million of which was used for capital additions. The Company used cash from operations and available cash on hand to purchase Eastman's polyethylene business in Longview, Texas for $235.7 million. At December 31, 2006 the Company's cash and cash equivalents balance was $52.6 million and debt was $260.2 million.
The Olefins segment experienced a loss from operations of $2.6 million in the fourth quarter of 2006 compared to income from operations of $56.2 million in the fourth quarter of 2005. This decrease was primarily due to reduced selling prices for ethylene and polyethylene, lower sales volumes for ethylene and an unscheduled outage and maintenance turnaround at one of the Company's ethylene units in Lake Charles, Louisiana. Polyethylene converters slowed their buying in anticipation of lower prices, which in fact occurred as polyethylene prices decreased $0.15 per pound during the quarter. Merchant ethylene sales volumes were lower for the fourth quarter of 2006 as compared to the fourth quarter of 2005 largely due to the increase in internal ethylene consumption at our Geismar vinyls facility. These decreases were partially offset by lower feedstock costs and higher polyethylene sales volumes. The higher polyethylene sales volumes were primarily due to the Longview acquisition.
Fourth quarter 2006 income from operations for the Olefins segment was $44.5 million lower than that reported in the third quarter of 2006 primarily due to lower selling prices for the Company's olefins products, lower ethylene sales volumes and the unscheduled outage discussed above. These reductions were partially offset by higher polyethylene sales volumes and lower feedstock costs. Polyethylene sales volumes were higher in the fourth quarter of 2006 primarily due to the Longview acquisition.
Income from operations for the Olefins segment decreased by $34.8 million, or 17.8% to $160.9 million for the year ended December 31, 2006 from $195.7 million for the year ended December 31, 2005. This decrease was primarily due to the adverse impact of the unscheduled outage and maintenance turnaround at one of the Lake Charles ethylene units and the nonrecurring effect in 2005 of the two hurricanes that hit the U.S. Gulf Coast resulting in record earnings in the fourth quarter of 2005. This decrease was partially offset by price increases throughout the Olefins segment outpacing higher feedstock costs, which resulted in higher profit margins for ethylene and polyethylene for the first three quarters of 2006 as compared to the first three quarters of 2005. In addition, feedstock commodity trading gains were recognized in 2006 as compared to a loss in 2005. Falling energy and feedstock costs and weakened demand led to sharp declines in ethylene and polyethylene prices in the fourth quarter of 2006 resulting in weak performance in the last quarter of the year.
Income from operations for the Vinyls segment decreased by $47.6 million, or 82.2% to $10.3 million for the fourth quarter of 2006 from the $57.9 million reported in the fourth quarter of 2005. This decrease was primarily due to lower selling prices for VCM, PVC resin and PVC pipe and lower sales volumes for PVC resin and PVC pipe. Weakness in the construction industry and falling energy prices led to de-stocking of inventory by PVC converters anticipating lower prices. Seasonal slowdowns also led to the decline. The lower sales volumes in the Vinyls segment resulted in lower operating rates and higher unabsorbed cost. These decreases were partially offset by lower costs of propane and ethylene.
Fourth quarter 2006 income from operations for the Vinyls segment decreased by $38.6 million from the $48.9 million reported in the third quarter of 2006. This decrease was primarily due to lower selling prices and sales volumes for PVC resin and PVC pipe. These decreases were partially offset by lower raw material costs for propane and ethylene.
Income from operations for the Vinyls segment decreased by $21.5 million, or 12.0%, to $157.9 million for the year ended December 31, 2006 from $179.4 million for the year ended December 31, 2005. This decrease was primarily due to lower production volumes and higher maintenance expense related to the planned maintenance turnaround at the Calvert City facility that occurred in May 2006, higher raw material costs and a significant reduction in demand for PVC resin and PVC pipe in the fourth quarter of 2006. Selling prices and sales volumes for PVC resin and PVC pipe fell sharply in the fourth quarter of 2006 resulting in lower operating rates, lower profit margins and higher unabsorbed cost.
The statements in this release relating to matters that are not historical facts are forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially, based on factors including, but not limited to: the cyclical nature of the chemical industry; availability, cost and volatility of raw materials and utilities; governmental regulatory actions and political unrest; global economic conditions; industry production capacity and operating rates; the supply/demand balance for Westlake's products; competitive products and pricing pressures; access to capital markets; technological developments; and other risk factors. For more detailed information about the factors that could cause actual results to differ materially, please refer to Westlake's Annual Report on Form 10-K for the year ended December 31, 2005, which was filed with the SEC in February 2006.
In this release, Westlake refers to a non-GAAP financial measure, EBITDA. EBITDA is calculated as net income before interest expense, income taxes, depreciation and amortization. The body of accounting principles generally accepted in the United States is commonly referred to as "GAAP." For this purpose a non-GAAP financial measure is generally defined by the U.S. Securities and Exchange Commission as one that purports to measure historical and future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measures. We have included EBITDA in this release because our management considers it an important supplemental measure of our performance and believes that it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, some of which present EBITDA when reporting their results. We regularly evaluate our performance as compared to other companies in our industry that have different financing and capital structures and/or tax rates by using EBITDA. EBITDA allows for meaningful company-to-company performance comparisons by adjusting for factors such as interest expense, depreciation and amortization and taxes, which often vary from company to company. In addition, we utilize EBITDA in evaluating acquisition targets. Management also believes that EBITDA is a useful tool for measuring our ability to meet our future debt service, capital expenditures and working capital requirements, and EBITDA is commonly used by us and our investors to measure our ability to service indebtedness. EBITDA is not a substitute for the GAAP measures of earnings or of cash flow and is not necessarily a measure of our ability to fund our cash needs. In addition, it should be noted that companies calculate EBITDA differently and, therefore, EBITDA as presented in this release may not be comparable to EBITDA reported by other companies. EBITDA has material limitations as a performance measure because it excludes (1) interest expense, which is a necessary element of our costs and ability to generate revenues because we have borrowed money to finance our operations, (2) depreciation, which is a necessary element of our costs and ability to generate revenues because we use capital assets and (3) income taxes, which is a necessary element of our operations. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA only supplementally. A table included in the financial schedules at the end of this release reconciles EBITDA to net income and to cash flow from operating activities.
Westlake Chemical Corporation Conference Call Information:
A conference call to discuss Westlake Chemical Corporation's fourth quarter results will be held Tuesday, February 20, 2007 at 11:00 a.m. EST (10:00 a.m. CST). To access the conference call, dial (866) 770-7120, or (617) 213-8065 for international callers, approximately 10 minutes prior to the scheduled start time and reference passcode 58505744.
A replay of the conference call will be available beginning an hour after its conclusion until 1:00 p.m. EST on Tuesday, February 27, 2007. To hear a replay, dial (888) 286-8010, or (617) 801-6888 for international callers. The replay passcode is 14463440.
The conference call will also be available via webcast at: http://phx.corporate-ir.net/phoenix.zhtml?p=irol- eventDetails&c=180248&eventID=1473514 and the earnings release can be obtained via the company's Web page at: http://www.westlakechemical.com/investors.html .
Westlake Chemical Corporation is a manufacturer and supplier of petrochemicals, polymers and fabricated products with headquarters in Houston, Texas. The company's range of products includes: ethylene, polyethylene, styrene, propylene, caustic, VCM, PVC and PVC pipe, windows and fence. For more information, visit the company's Web site at http://www.westlakechemical.com .
WESTLAKE CHEMICAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Year Ended December 31, December 31, 2006 2005 2006 2005 (In thousands of dollars, except per share data) Net sales $523,903 $636,439 $2,484,366 $2,441,105 Cost of sales 492,866 501,335 2,087,883 1,997,474 Gross profit 31,037 135,104 396,483 443,631 Selling, general and administrative expenses 22,529 22,604 83,232 76,598 Income from operations 8,508 112,500 313,251 367,033 Interest expense (3,163) (5,850) (16,519) (23,717) Debt retirement cost --- --- (25,853) (646) Other income, net 3,013 2,336 11,670 2,658 Income before income taxes 8,358 108,986 282,549 345,328 (Benefit from) provision for income taxes (6,039) 35,364 87,990 118,511 Net income $14,397 $73,622 $194,559 $226,817 Earnings per common share: Basic $0.22 $1.13 $2.99 $3.49 Diluted $0.22 $1.13 $2.98 $3.48 Weighted average shares outstanding: Basic 65,202,414 65,071,115 65,133,628 65,008,253 Diluted 65,313,450 65,262,258 65,254,654 65,251,109 WESTLAKE CHEMICAL CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) December 31, 2006 2005 (In thousands of dollars) Current assets Cash and cash equivalents $52,646 $237,895 Accounts receivable, net 308,903 302,779 Inventories, net 456,276 339,870 Other current assets 31,962 22,319 Total current assets 849,787 902,863 Property, plant and equipment, net 1,076,903 863,232 Other assets, net 155,408 61,094 Total assets $2,082,098 $1,827,189 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued liabilities $321,912 $304,649 Current portion of long-term debt --- 1,200 Total current liabilities 321,912 305,849 Long-term debt 260,156 265,689 Other liabilities 326,489 261,545 Total liabilities 908,557 833,083 Stockholders' equity 1,173,541 994,106 Total liabilities and stockholders' equity $2,082,098 $1,827,189 WESTLAKE CHEMICAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Year Ended December 31, 2006 2005 (In thousands of dollars) Cash flows from operating activities Net income $194,559 $226,817 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 86,262 81,241 Deferred income taxes 13,852 45,745 Other balance sheet changes (57,489) (35,356) Net cash provided by operating activities 237,184 318,447 Cash flows from investing activities Additions to property, plant and equipment (136,258) (85,760) Additions to equity investment (4,574) (1,867) Purchase of short-term investments (216,510) --- Sales and maturities of short-term investments 216,510 --- Acquisition of business (235,674) --- Settlements of derivative instruments (28,052) --- Proceeds from disposition of assets 222 37 Net cash used for investing activities (404,336) (87,590) Cash flows from financing activities Proceeds from exercise of stock options 1,849 1,184 Dividends paid (8,802) (6,342) Proceeds from borrowings 249,185 --- Repayments of borrowings (256,000) (31,200) Capitalized debt issuance costs (4,329) --- Net cash used for financing activities (18,097) (36,358) Net (decrease) increase in cash and cash equivalents (185,249) 194,499 Cash and cash equivalents at beginning of period 237,895 43,396 Cash and cash equivalents at end of period $52,646 $237,895 WESTLAKE CHEMICAL CORPORATION SEGMENT INFORMATION (Unaudited) Three Months Ended Year Ended December 31, December 31, 2006 2005 2006 2005 (In thousands of dollars) Net Sales to External Customers Olefins $319,686 $324,757 $1,369,580 $1,350,042 Vinyls 204,217 311,682 1,114,786 1,091,063 $523,903 $636,439 $2,484,366 $2,441,105 Income (Loss) from Operations Olefins $(2,570) $56,168 $160,875 $195,670 Vinyls 10,312 57,925 157,918 179,407 Corporate and Other 766 (1,593) (5,542) (8,044) $8,508 $112,500 $313,251 $367,033 Depreciation and Amortization Olefins $15,869 $12,145 $51,741 $46,844 Vinyls 8,386 8,425 34,391 34,343 Corporate and Other 33 22 130 54 $24,288 $20,592 $86,262 $81,241 Other Income (Expense), net Olefins $(11) $63 $(12) $(1,933) Vinyls 61 25 216 301 Corporate and Other* 2,963 2,248 (14,387) 3,644 $3,013 $2,336 $(14,183) $2,012 * Debt retirement costs of $25,853 and $646 are included in the year ended December 31, 2006 and December 31, 2005, respectively. WESTLAKE CHEMICAL CORPORATION RECONCILIATION OF EBITDA TO NET INCOME AND TO CASH FLOW FROM OPERATING ACTIVITIES (Unaudited) Three Months Ended Three Months Ended Year Ended September 30, December 31, December 31, 2006 2006 2005 2006 2005 (In thousands of dollars) EBITDA $111,357 $35,809 $135,428 $385,330 $450,286 Less: Provision for (benefit from) income taxes 25,191 (6,039) 35,364 87,990 118,511 Interest expense 3,432 3,163 5,850 16,519 23,717 Depreciation and amortization 21,078 24,288 20,592 86,262 81,241 Net income 61,656 14,397 73,622 194,559 226,817 Changes in operating assets and liabilities 6,431 4,684 54,481 28,773 45,885 Deferred income taxes (1,119) 4,235 15,218 13,852 45,745 Cash flow from operating activities $66,968 $23,316 $143,321 $237,184 $318,447 Fourth Quarter 2006 vs. Fourth Quarter 2006 vs. Fourth Quarter 2005 Third Quarter 2006 Average Average Sales Price Volume Sales Price Volume Olefins(1) -12.1% +12.6% -7.8% -2.9% Vinyls(2) -19.7% -18.4% -15.5% -22.2% Company -14.7% -3.5% -10.6% -12.5% (1) Includes: Ethylene and co-products, polyethylene, and styrene (2) Includes: Ethylene co-products, caustic, VCM, PVC resin, PVC pipe, and other fabrication products Average Quarterly Industry Prices (1) Quarter Ended December March June September December 2005 2006 2006 2006 2006 Ethane (cents/lb) 25.7 19.2 22.8 25.5 20.8 Propane (cents/lb) 25.2 22.4 24.9 26.0 22.4 Ethylene (cents/lb) (2) 55.8 50.3 46.5 50.7 44.8 Polyethylene (cents/lb) (3) 86.0 78.0 73.0 78.7 68.0 Styrene (cents/lb) (4) 63.8 60.6 61.7 70.1 66.9 Caustic ($/ short ton) (5) 457.5 424.2 393.3 361.7 337.5 Chlorine ($/ short ton) (6) 357.5 332.5 332.5 332.5 322.5 VCM (cents/lb) (7) 48.0 44.0 42.2 43.9 39.6 PVC (cents/lb) (8) 65.8 62.8 60.0 61.3 57.0 (1) Industry pricing data was obtained through the Chemical Market Associates, Inc., or CMAI. We have not independently verified the data. (2) Represents average North America spot prices of ethylene over the period as reported by CMAI. (3) Represents average North America contract prices of polyethylene film over the period as reported by CMAI. (4) Represents average North American spot prices of styrene over the period as reported by CMAI. (5) Represents average North America spot prices of caustic soda (diaphragm grade) over the period as reported by CMAI. (6) Represents average North America contract prices of chlorine (into chemicals) over the period as reported by CMAI. (7) Represents average North America contract prices of VCM over the period as reported by CMAI. (8) Represents average North America contract prices of PVC over the period as reported by CMAI.
CONTACT: investors, Steve Bender, or media, David R. Hansen, both of Westlake Chemical Corporation, +1-713-960-9111